Reddit (RDDT) shares are down around 2.6% premarket Tuesday following a downgrade from Loop Capital, which cited valuation concerns as the primary reason for the shift. The firm lowered its rating on Reddit from Buy to Hold, maintaining a $75 price target.
"RDDT shares are now trading at 10x our 2025 estimated revenue and are approaching our $75 price target," analysts at Loop Capital noted. They expressed concern that even with potential upside to 2024 and 2025 estimates, the stock's high valuation relative to its peers poses a risk.
Reddit's stock has more than doubled since its March IPO, leading to a significant premium revenue multiple compared to similar companies.
Loop Capital highlighted several potential drivers of incremental earnings upside, including stronger user growth, enhanced monetization strategies, the opening up of the user economy, and increased data licensing.
However, they tempered their optimism by noting, "Even if 2025 revenue is 10% ahead of our projection, which is already slightly ahead of consensus, a 10X revenue multiple would then suggest an $81 price target, which is not sufficient upside in our opinion to maintain the Buy rating."
The analysts also pointed out that Reddit is expanding its advertising to conversation pages, which is the platform's fastest-growing ad surface. This move aims to capitalize on the contextually relevant space where 40% of comments and conversations are about a product or service.
Furthermore, they state that Reddit is also focusing on performance-oriented ad formats and improving its advertising tools.
One significant factor contributing to the downgrade is the upcoming lock-up expiration on August 9, which will release approximately 133 million shares. Loop Capital cautioned that there might be selling pressure as early investors could take advantage of Reddit's strong performance to liquidate their positions.
While Reddit shows potential for growth, Loop Capital's downgrade reflects caution due to the stock's current high valuation and the approaching lock-up expiration.